Financial Advice Blog

Should you buy a property in a trust or your own name?

While trusts offer flexibility and protection, there are downsides to consider as well. Find out if buying a property in a trust is right for you.

Trusts have been around for hundreds of years and have traditionally been used by the wealthy to protect their assets and pay less tax. While this may sound effective, if you ask around you’ll find that few people actually use a trust structure when buying property.

Here we share what a trust structure is, including the pros and cons of buying property in a trust structure, so you can work out if it’s right for you.

What is a trust structure?

A trust structure is an ownership structure where the legal owner is not the beneficial or eventual owner.  In other words, a person or company owns the asset on behalf of someone else.  This creates a separation between the owner of the asset and who will gain the benefit of the asset.

What are the advantages of buying property in a trust?

A big advantage of buying property in a trust is that the structure provides flexibility in distributing both income and capital gains to a group of people at the discretion of the trustee. Under normal circumstances, the income and any capital gains belong to you, the owner. In a trust structure, the income and capital gains belong to the trust and the trust has to distribute them based on the terms of the trust deed.  A trust also helps to ensure that the property is transferred to your designated beneficiaries upon your death.

Another advantage of a trust structure is that it can provide legal and financial protection.  A trust structure increases the chances that the property will not form part of a person’s asset base in the event of legal or creditor action.

But while the flexibility and asset protection sound advantageous, there are downsides to buying property in a trust.  It is because of these disadvantages that trusts aren’t as widely used as you’d expect.

What are the disadvantages of buying property in a trust?

The main disadvantages of buying property in a trust structure are the cost and tax implications.  A trust structure can be costly and complex to set up. It will create an extra set of accounts, documentation (such as meeting minutes) and lodgements. Due to their complexity, trust tax returns are usually more expensive than personal tax returns too.

With a trust structure, you will be subject to greater land tax, as the tax threshold for trusts differs to that of individuals. Also, if you’re buying a home, there may be tax implications for the capital gains tax exemption.

In the case of an investment property, a trust can distribute income, but it can’t distribute a loss. If your investment property gives you tax deductions to offset against your normal income, a trust structure won’t allow you to use those deductions. Rather, a trust will hold onto any losses and only use them to offset profits. Once you take depreciation into consideration, it could take a while for the property to return after-tax profits.  During this time you won’t enjoy any tax relief. For some people, this isn’t an issue. But for many property investors, the tax deductions over the first 10 years are often key to affordability and pursuing other financial goals.

Is buying property in a trust structure right for me?

The decision to buy a property in a trust or your own name is a complex one that requires careful consideration of your specific circumstances and goals.  You’ll see from the above that there is no perfect solution, with each scenario presenting both advantages and disadvantages.

What’s important is that you understand what you’re trying to achieve with your property investment and the long-term implications. You don’t want to change structures around in the future as you’ll incur stamp duty and capital gains tax costs.

It’s therefore essential that you seek the right legal, financial and tax advice upfront. There are many factors to consider when deciding whether or not to buy property in a trust.  If you don’t cover them all, you could be in for an unpleasant surprise.

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